$LULU Fiscal Q1 Preview and Defining Risk

by Dan June 7, 2016 1:27 pm • Commentary• Trade Ideas

Event: LuluLemon (LULU) reports fiscal Q1 results tomorrow before the open.  The options market is implying about a 10% one day move following results, which is shy of the 4 qtr one day post earnings move average of about 13%, but in line with the long term average since their 2007 IPO.

Price Action / Technicals: Shares of LULU are up a whopping 29% ytd, showing tremendous out-performance to Nike (NKE) down 13.5% on the year and Under Armour (UA) down 11% on the year.  LULU is threatening a breakout after its more than 10% rally from $60 over the last couple weeks, and is 3% from its 52 high made in early April:

[caption id="attachment_64166" align="aligncenter" width="600"]LULU 1yr chart from Bloomberg LULU 1yr chart from Bloomberg[/caption]

Longer term, draw the lines anyway you like, but the 5 year clearly shows $60 as an important support/ resistance level, while $70 appears to be staunch resistance:

[caption id="attachment_64167" align="aligncenter" width="600"]LULU 5 year chart from Bloomberg LULU 5 year chart from Bloomberg[/caption]

Sentiment: Wall Street analysts remain fairly mixed on the stock with 21 Buy ratings, 11 Holds and 5 Sells with an average 12 month price target of $69.45, not much above where it is currently trading.  Short interest sits at a whopping 21.4% of the float.

Valuation: LULU has been a fairly consistent low to mid teens sales grower for the last 3 years, with fiscal 2017 sales growth expected to be 13%, despite eps growth expected to decline yoy on an adjusted basis. LULU trades about 31x expected f2017 eps of $2.14, very  near a 5 year high on a forward  basis.

My View: if the company is able to post a beat and raise fiscal 2017 guidance then a short squeeze above a key technical breakout level will most definitely be in the cards. The recent bounce off of support last month at $60 may discount some potential good news though, but it is really about forward guidance in my mind. Also, 30% of LULU’s sales come from outside the U.S. largely Canada, and some Asia, so the dollar’s sequential weakness in the quarter just ended could be a wildcard, but any benefit may be offset in the current quarter given the bounce since the May lows. 

Gun to my head, I’d rather play for a re-tracement of the recent move than a breakout above 52 week highs, as the relative out-performance of late to NKE and UA could quickly be reversed if the company were to disappoint.

Estimates and Forecasts from Bloomberg:

-1Q adj EPS est. 31c (range 29c-34c); co. forecast 28c-30c (March 30)

-1Q rev. est. $487.6m (range $483m-$497m), co. forecast $483m-$488m (March 30)

-1Q comp. sales including DTC est. +6.7% (Consensus Metrix, avg of 29), saw up mid-single digits on constant dollar basis

-Comp. sales without DTC est. +2.8%

-FY17 adj EPS est. $2.14 (range $1.88-$2.25); co. forecast $2.05-$2.15 (March 30)

-FY17 rev. est. $2.33b (range $2.29b-$2.38b), co. forecast $2.29b-$2.34b (March 30)

-Saw full-year comps. up mid-single digits on constant-dollar basis

So What’s the Trade?

The stock is obviously at a precarious spot to enter as a new long or for existing longs. Any disappointment and the stock could quickly retrace some of this year’s impressive gains. To play for a breakout from here defined risk is the name of the game:

Stock Alternative / Breakout:

Buy the LULU (67.50)  Jun 10th/ July 74/ 67.5 vertical call calendar for 3.00
  • Sell 1 June 10th 74 call at .75
  • Buy 1 July 67.5 call for 3.75

Rationale – this trade defines risk to just 3.00 (about 4.5% of the underlying). That sounds like a lot but remember the implied move is 10%, or closer to 7 dollars. The trade breaks even on the upside at 70.50, so it is playing for a breakout above recent highs. The weekly call being sold helps finance the at the money calls owned in July. That’s helpful because July vol is likely to get cut by 25-30% after the event. In essence, the call sale in the weeklies covers that vol collapse in July. The strike chosen for the call sale in the weeklies is just outside the implied move to the upside. If the stock outperforms the move to the upside profits are capped above 74, but money can’t be lost because even with the stock substantially higher than 74 the profits of the vertical are 3.50 (max gain before Friday expiration). Assuming the stock is below 74 on Friday, the 74 calls can be rolled to June regular or July regular expiration, further financing the at the money 67.5 long calls in July.


For those looking to play for a pullback in LULU (and a failure at these recent highs) risk should also be defined as the potential for a short squeeze exists.


Buy the LULU ($67.50) June 17th 67.50/60/52.50 put butterfly for 1.75
  • Buy 1 June17th 67.50 put for 3.05
  • Sell 1 June17th 60 put at 70 each, or 1.40 total
  • Buy 1 June17th 52.50 puts for 10 cents

Break-Even on June 17th expiration:

Profits: of up $5.75 between $65.75 and $54.25 with max gain of $5.75 at $60, or prior technical support.

Losses: up to 1.75 between $52.50 and $54.25 & between $65.75 and $67.50 with max loss of 1.75 below $52.50 and above $67.50.

Rationale – Straight up long premium directional bet that the stock re-traces back to its recent bounce level.